Monday, November 01, 2010

An Open Letter to Ben Bernanke

Ours is not an economics column, nor do we profess to grasp the mechanics of how it is, exactly, that you do what you do.

Indeed, the truth is, Macroeconomics was, for us, a snooze-fest—and a fairly literal one at that.

Our impression of the dismal science from those, er, hazy days from 30 years ago, if you get our drift, includes mainly random lines on charts—red lines and green lines and blue lines—and equations of the “GDP = C+ I + G” type, which as best we can recall means Gross Domestic Product equals Consumption plus Ingestion plus Gastronomy, or something.

Nonetheless, while we admit to not being schooled enough to grasp the finer points of your job as Fed Chairman, we do have a strong opinion about your persistence in bemoaning the state of the current unemployment rate, as well as your determination to plow ahead with the purchase of billions of dollars of Federal debt at negligible interest rates in order to, somehow, cure that high unemployment rate.

Our opinion is that your plan it is doomed to look foolish thanks to an impending rise in employment, and corresponding drop in unemployment, that we think will happen even without you buying a single government bond.

How, you may ask, do we dare argue given our own lack of schooling in your own chosen field?

Well, we listen to a lot of earnings calls with companies that do business all over the world. And we think if you bothered to do the same, it would change your mind about the inevitable persistence of that “stubbornly high unemployment rate,” to quote the well-worn phrase.

The conference calls we speak of comprise the earnings calls that publicly-listed companies routinely hold on a quarterly basis with investors to review the previous three months’ worth of their business activities.

They are free of charge—your minions can find them archived on corporate websites—and only take an hour or so apiece.

If, however, you’re in a hurry and don’t have an hour to spare, you can fast forward past the usual CEO patter about “executing our strategic plan” and the frequently mind-numbing financial report from the CFO, and get right to the Q&A.

And if you did this, you would hear a few things you are not seeing in the muted employment numbers that seem to have your kickers in a proverbial twist.

For example, you would hear the CEO of one of the world’s largest outplacement firms, Manpower, say:

As I've stated before, as early as a year ago, we believed that the, slow but steady, demand for our clients' goods and services, coupled with uncertainty and a will to change the flexibility of their workforce, is creating sustainable positive secular trends for us. The growth we experienced in September, and to date in October, is also very important. As we stated in the past, the ability to see growth after the August break in Europe and the Labor Day break in the US was an extremely important indicator for us, for the health for the rest of the year.

For the most part, we picked up where we left off, with growth rates across all geographies quite strong.

And the CEO of the world’s largest private equity firm, Blackstone Group:

Our current portfolio is benefiting from the recovery. It's been underway in commercial real estate. We feel very good about the $15 billion of investments we made during the 2004 to 2008 period, which are now valued above cost including realized proceeds.

Our office markets have generally stabilized. And certain markets such as New York and London are seeing improvements in both leasing activity and asking rents.

New supply remains extremely limited with construction starts 80% below historical averages. In hospitality, RevPAR has been positive for six straight months, benefiting from both improving occupancy and more recently, higher room rates.

Indeed, you’d also hear the CEO of the world’s largest advertising group, WPP PLC, say:

So just in terms of summary of the regional growth, United States was the first to recover, and it has had five quarters of improving like-for-like revenues, with 9.7% in quarter three, more like an emerging market status.

Western Continental Europe is our second-largest region, with significant improvement in like-for-like growth, with quarter three up 4.7%. The UK and Asia Pacific, Latin America, Africa and the Middle East and Central and Eastern Europe were both up well over 7% on a like-for-like basis in the quarter.

And in Asia Pacific, Mainland China and India lead the region with like-for-like revenue growth of over 22% and 15%, respectively. Australia has recovered with like-for-like growth of almost 7%. And Japan was up in this quarter, as it was in quarter two. So we've had two quarters of growth from our Japanese business.

And the Chairman of a little railroad called Union Pacific:

As for the third quarter we are reporting record results….our most profitable quarter ever. Similar to last quarter, we achieved volume growth across each of our six business teams. Total third quarter car loadings were up about 14% to more than 2.3 million. That's our highest level in two years but still 9% below our peak in 2007.

Yes, it is a fact that business at the UP is still below peak levels, as is US employment. But things do not seem to be slowing down there, as the company’s head of marketing made clear:

Let me give you a quick overview of some the specific growth drivers that we expect to see in the fourth quarter. Our industrial products business look to have the most upside with the best opportunities in markets that are benefiting from improved product production, increasing drilling activity and hazardous waste disposal. International and domestic intermodal segments will continue to drive growth with some indication that the international peak may be slightly longer than we thought. Fall demand for fertilizer is expected to be stronger than last year and petroleum should post gains with crude -- growth of crude oil shipments to St. James and increased residual fuel oil moves.

Also looks like industrial chemicals and soda ash will hold their current run rates and that will close the rate stronger than a year ago. Increased electrical demand and expectation of inventory replenishment following a hot summer are expected to keep our coal trains moving and while feed grain exports will likely not be able to match last year's near record levels, wheat exports should supply a nice boost to our ag products business as we close the year and move into next.

Finally we expect our automotive run rate to hold -- our automotive run rate to hold steady but sales forecast to stay in the mid-$11 million range through the end of the year with production slightly ahead of the fourth quarter of last year. That's how we see the quarter shaping up…

Exactly how, Mr. Bernanke, do you expect to do push the Union Pacific to higher heights than it is achieving without your bond purchases?

Now, the good times are not limited to the western side of the country, from which the UP hails: its eastern counterpart, the Norfolk Southern, is also seeing good things in the heartland:

Volumes in the third quarter improved 15% year-over-year and 2% sequentially from the second quarter. We also posted 52-week highs in several commodity groups …. Against this strengthening economic back drop, we continue to improve productivity as we safely handled increasing traffic levels. As compared to the 15% volume increase, crew starts were up only 8% and total employment up a modest 2%.

We know what you’re thinking. You’re thinking: ‘See! There’s the problem! Employment at Norfolk Southern has not risen in line with revenues.’

But, again, we wonder, how exactly would your bond purchases make the good times any better than they are?

If two railroads that cover most of the United States can’t convince you that fundamental business conditions are quite decent, let’s look at one of the nation’s largest industrial distributors—W.W. Grainger:

All segments were up versus the prior year quarter. Specifically, reseller was up in the high 30s related to the Gulf of Mexico oil spill cleanup. Heavy manufacturing was up in the low 20s. Light manufacturing was up in the low double digits. Retail was up in the high single digits. Commercial was up in the mid-single digits. Government and contractor were up in the low single digits.

Not a weak spot in the joint.

Still, after listening to the repeated use of the term “up,” you may well wonder why, then, companies have been so slow to hire.

Caterpillar, the heavy equipment maker, sheds some light on that very question:

….we are seeing growth in the developed countries of North America and Europe, albeit off depressed levels from 2009. With weak economic recoveries in the US and Europe and with depressed construction activity, I know it is tough to understand why sales of Cat machines are up so much. And new machine sales in the United States are a good example that illustrates the point.

Here is what is happening - First, sales to users peaked in 2006, then declined in 2007, declined again in 2008 and then declined even more significantly in 2009. From the peak quarter in 2006 to the bottom in late 2009, dealer machine sales to end users in the US declined nearly 80%.

That’s right: Caterpillar equipment sales to end customers were off 80% from their peak at the apocalyptic bottom.

Is it any wonder that hiring has not come back as quickly as in years past? Wouldn’t you be a little gun-shy about adding FTEs until you were convinced things were trending in the right direction?

Here’s how advertising giant WPP PLC described the downdraft during the crisis, and the slow rebound in hiring:

On the other side, taking the headcount down by 12% in 2009 was very severe, and there had to be some bounce-back from what we had done. I think people responded to the challenge very well, but there probably -- there was too much tightness, if that is the right word, in the system. So it had to be -- we had to invest a bit more, particularly when we started to see revenue growth, not so much in the first quarter, but we saw a five-point shift in the second quarter, and we've seen another three-point shift upwards in the third quarter.

And it is not only advertising agencies and equipment makers that are hiring—the Union Pacific is hiring, too:

In terms of employees we have 1100 on furlough while recall rates have averaged better than 80% this year, the current furlough pool has been out of work since late 2008. So we expect only about half of these to return to service. Because of this we were ramping up our hiring efforts systemwide for 2011.

So is Norfolk Southern:

Turning to the next slide, train and engine employment increased by 501, or 4.8%, in the third quarter as we continue to strategically hire to support traffic growth where we had let attrition decrease in employee counts in 2008 and 2009. As I stated last quarter, all T&E employees have been returned from furlough status. To date we have authorized the hiring of 1,550 conductor trainees with the first of those trainees now starting to come off training program ready for placement.

And Manpower as well, albeit slowly:

We're continuing to see the benefits of strong momentum, as we moved into the third quarter. Across all areas our infrastructure is intact and we are quickly filling in the capacity. As you would suspect, not all areas are filling in at the same pace. So, even with excess capacity, we had to increase our staff in areas, adding just over 600 people in the third quarter.

Now, with all this business going around, you’d think hotels would be seeing more business—and they are. Here’s the CEO of Marriott International:

The business traveler is back. We're excited to see demand so strong in so many places with prices moving up. But we know what you want to know, essentially where do we go from here? According to the National Bureau of Economic Research, the recession officially ended in June 2009.

Notwithstanding that, many seemed to wonder whether the economic recovery has any strength and about the risk of a double dip. Let's be clear. There is nothing in our business which indicates that sort of weakness. Both business transient and leisure travel remain strong.

If travel is strong, airlines must be better—and here’s how Delta described things:

Turning to revenue, our revenue for the quarter was $9 billion, up $1.4 billion, or 18%, on a year-over-year basis against a 2% increase in capacity. Our consolidated passenger unit revenues increased over 16% year-over-year, driven by a higher corporate revenue and international mix. Corporate revenue was up 35% year-over-year, driven largely by a 27% increase in corporate volumes. Our domestic unit revenues increased 10% over the prior year on a two point increase in capacity. Our domestic yields were up 12%.

Turning to international markets, we are seeing continuing strength with unit revenues up 29% year-over-year, with both yields and load factors showing significant improvement. The Transatlantic business is above its 2007 run rates, with unit revenues up 25% year-over-year on a one point increase in capacity. Our Pacific routes have performed very well and we're seeing especially strong results in the beach markets, particularly between Japan and Hawaii. Our overall Pacific unit revenues have increased 45% year-over-year on a six point growth in capacity. Our Latin unit revenue increased 16% on an 8% increase in capacity. South America's performing well driven by the recovery of business traffic.

What is it, exactly, Ben, that are you so panicked about?

If it’s deflation, well, outside of the housing market, you won’t hear about that. Here’s what the Union Pacific had to say about your deflation:

As we close out the year, we continue to feel very positive about our future pricing opportunities and are committed to achieving real pricing gains that will drive higher returns. Let's discuss the expense details starting with compensation and benefits at $1.1 billion in the third quarter, a 9% increase versus last year. Roughly half of the higher year-over-year expense relates to wage and benefit inflation. We also seeing higher costs as train starts increase generating more starts per employee as well as paying more for overtime and training expenses. In addition, equity and incentive compensation was a little higher year-over-year driving about 10% of the increase. Offsetting a portion of these higher costs is our strong employee productivity…

In fact, the UP is starting to see exactly what you’d expect to see at this point in the cycle: upward wage pressure as existing employees work overtime:

We had a lot of overtime. We have been pushing the overtime curve here in terms of absorbing some of the volume. That's out of here. Our health care costs have jumped up pretty substantially here in third quarter. You look out to the future. Our inflation number that we look at is in that 3.5% to 4% range. That's what you have to think about.

Norfolk Southern is seeing higher labor costs:

Slide five reflects the components of the 14% increase in compensation and benefits. First volume related payroll increased $34 million including $18 million for train and engine employees. Second, medical benefits increased $20 million largely related to higher agreement employee health and welfare premiums coupled with increased retiree medical costs. Third, incentive compensation was up $13 million due primarily to stronger financial results. Pension expenses were $8 million higher and payroll taxes increased $7 million. Finally, increased agreement wage rates and other compensation expenses were offset by lower stock based compensation which reflected last year's strong improvement in performance metrics.

And so is Caterpillar:

Before I move on to the full-year outlook, I would like to cover employee incentive compensation in just a little more depth. As you may be aware, a portion of the compensation for management support and some of our hourly employees is at risk and it varies based on the financial performance of the Company. Given the economic environment in 2009, the profit target related to our short-term incentive plan was aggressive and it did not trigger.

Financial performance in 2010 has been much better and based on the newly-revised and higher profit outlook for 2010, we expect incentive compensation to be higher. Our practice is to accrue the expense as we go through the year based on our full-year expectations. That means when we change the outlook, we have a year-to-date catch-up in the provision. And that happened this quarter.

The outlook we provided with our second-quarter release included $600 million in incentive compensation. $300 million of that was in the first half and we had an expectation of about $150 million in each of the third and fourth quarters.

And so is Marriott:

Our corporate G&A spending increased 4% in the third quarter, reflecting higher incentive compensation. There isn't much more to cut but we continue to look for ways of doing things more efficiently.

In fact, we’re hearing more about inflation than deflation. Here’s what Marriott said:

The recovery is here and we're doing things differently. First, we're reducing discounting and improving our mix. For example, in the third quarter the Marriott Hotels and Resorts brand reduced the availability of rooms at discount and transient rates such as packages, wholesale, government and other similar programs. While we reduced these room nights by 16% in the quarter, they were more than replaced by a 16% increase in corporate and special corporate guests paying $57 more on average than the discounted business. We expect to continue to improve our mix in 2011. And we're raising room rates.

Even in the capital markets, inflation is back. Here’s how serial-acquirer WPP PLC put it when discussing acquisition targets:

But I think pricing is an issue. There is a lot of aggressive dealmaking. Investment banking advisers and brokers are being very aggressive on process, and that's a little bit disturbing. It would make the Guy Hands' Citibank-EMI process look relatively pedestrian.

“Disturbing” indeed—especially when a certain Fed Chairman wants to buy half a trillion in Treasury paper at all-time high prices.

Now, we are well aware that you may perceive that the quotes above have merely been selected to prove a point, and thus are likely to view them with suspicion, especially since they do not seem to gibe with months-old economics statistics.

So we wondered if there was a way to somehow put numbers on what we heard.

After minutes of tinkering with our Bloomberg, we came up with the following statistical summary of this conference call season that might help put a less subjective face on the previous body of evidence: it is the first ever NotMakingThisUp Conference Call Survey.

The results of this survey, we think, are illuminating.

For example, in the previous nine weeks (the heart of third quarter earnings season), the phrase “Very weak” appeared in 91 earnings calls—a 29% decline from last year, when the phrase appeared during 150 earnings calls.

Furthermore, the phrase “Very strong growth” appeared in 132 calls this year compared to 112 last year—an 18% increase.

As far as your concern about deflation goes, well, the term “deflation” was used in 61 calls this year, compared to 101 calls last year—a 40% drop.

Meanwhile, “inflation” was spoken of on 399 conference calls, compared to 385 last year—a modest and perhaps statistically insignificant gain of nearly 4%, but more than six-times the number in which “deflation” reared its ugly head.

Encouragingly, too, the use of “layoffs” collapsed, from 78 last year to 48 this year—a 38.5% drop.

And so, Mr. Bernanke, we here at NotMakingThisUp sincerely hope you skip today’s reading of statistical reports at your quiet lunch in some nuclear-attack-protected bunker deep within the bowels of Washington, and get out and listen to real people discuss real business, before you go and “execute your strategic plan” of buying half a trillion in Treasuries to somehow make employment start to go up at the very moment it looks like it may well start to be moving that way anyhow.

If, however, in the course doing so, you become nauseous at the recurring use of the phrase “executing our strategic plan” by America’s CEOs, well, don’t say we didn’t warn you.

The content contained in this blog represents only the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

24 comments:

Agree that QE2 would fail to achieve its main objective - raise aggregate demand. But I have a problem with your logic.

First, you can't dismiss something, such as Macroeconomic, just because you don't understand.

Second, where is the correlation between positive conference calls today and higher economic activity and lower unemployment in the US in the future? If you don't have the correlation data then your argument is weak.

And finally, if QE2 fails, then it won't result in hyperinflation. Furthermore, the likely major side effect is a weaker USD, which should help the export industry. If the downside is limited while there is some upside, then why not give it a try? It can only help.

Jeff- your analysis is spot on. The engines that fuel the economy are being tuned and are ready to start hitting on all cylinders. FedEx, Manpower, Cat, Blackstone(?), UP, etc... all the big boys are ready to shoot the moon.

Anonymous raises several goods points. 1) We don't dismiss Macroeconomics. We merely question the reliance on backward-looking statistical data--much as Greenspan did during the early Bubble yearss--for large-scale decision making such as QE2. 2) The correlation between positive outlooks from most major public companies and future employment should be clear. Our point in previous columns (which we did not repeat in this one) is that QE2 deals with interest rates, not the main anchor on new hiring, which is the uncertain outlook companies face regarding taxes and healthcare costs. 3) If QE2 fails, I don't argue it will result in hyperinflation. I argue it will result in the Fed owning Treasury bills at stupid prices.

Much better, in my view, would be this: have the FDIC use the Fed's half a trillion of QE2 to take all the foreclosed houses in America off the market. That would be far more stimulative than another minor drop in rates.

TBTF makes the excellent point in an unfortunately sarcastic and bitter fashion that we left out the banks, whose conference calls are not nearly as perky as the companies they serve.

What TBTF misses is that the banks' business models have been damaged by three recent issues not including the housing crisis (which they were in the act of recovering from until these issues derailed them), two of which QE2 does not deal with and the third it will actually make worse: 1) Dodd-Frank, which damaged credit card profitability, 2) mortgage put-backs, and 3) low interest rates.

Thus, QE2 not only would not help the banks, it would hurt their NIM.

(TBTF's final point, that the bank's balance sheet are crippled, is actually not correct: banks are well-capitalized for the most part.)

Seems to me to be a far better use of half a trillion dollars to buy foreclosed properties at cheap prices--thus clearing the market, reliquifying homeowners and banks, and removing the overhang to the one last deflationary trend in the US economy--than bidding up already bid-up Treasuries.

While Ben thinks that QE2 will boost employment or demand, it will instead simply jazz equity markets. And that ain't necessarily a good thing.

While demand may be up as suggested by these conference calls, this doesn't mean employment will go up in broad scale. The increased incentive compensation mentioned in these calls simply means more over time and less people to do it. Man Power is a temporary worker scam house.

And Jeff when unemployment continues to climb, you won't be seeing continued "increases in demand" on these conference calls.

Okay, enough from TBTF, however, thoughtful comments are always welcome.

Meanwhile, here's what Bob Rubin wrote about QE2 yesterday, thanks to a sharp-eyed reader via our morning mail on the topic:

'Another macroeconomic tool, quantitative easing, has been used aggressively. The much-discussed extension could work. Alternatively the economic effect could be quite limited, since interest rates are already very low, the stock market impact and consequent effect on consumption are uncertain, deflationary expectations are not currently significant economically, and weakening the dollar could generate harmful reactions elsewhere. And a large, new round of quantitative easing has real risks: undermining confidence in the Fed's ultimate refusal to monetise our debt; undesirably heightened inflationary expectations more broadly, now or later, or actual inflation; and competitive devaluations and trade restrictions.'

1. The steps they took (in concert with other CBs) in 2008-9 basically worked. So we see a tendency to want more of the same.

2. Ben Beranke has been declared an expert on both the Great Depression and Japan's Lost Decade. Other than Tom Hoenig, most policy makers are afraid to challenge the Man.

3. The FRBNY suffers acute myopia due to the disproportionate benefits that its NYC-based charges receive from monetary largess. Look for the biggest proponents of QE2 and I'll show you the chief economists of the bulge brackets.

The risks are not symmetrical. If the economy is in fact poised to take off anyway (I would say the evidence is more equivocal than you seem to.) then QE will just make it take off a bit faster. I don't see the problem; they will just be able to end it sooner than they would have otherwise.

If on the other hand you are mistaken, QE will be a good thing to have. So even if you are correct, I think your conclusion is mistaken.

RE Bob Rubin's comment - First, I am not sure if Rubin is qualified to critique monetary policy. To the best of my knowledge, monetary policy does not fall within Rubin's circle of competency.

Second, Rubin would be correct if we were in a normal economy, say unemployment ~5%, GDP is at or above trend, and interest rate around 4%. But not when there is huge unused capacity, 10% unemployment, zero interest rate, and GDP below trend. We are at the extreme - economic arguments that are sensible in normal times don't apply here.

Third, we are at zero bound territory, i.e., conventional monetary policy is powerless. We would be lucky if QE2 could actually undermine confidence in the Fed. If QE2 fails badly, then we would likely face debt deflation. Scary stuff. Heightened Inflationary expectations? I wish.

And finally, dollar weakness is what should happen. During the bubble years, huge amount of capital flowed into the US, drove asset price as well as debt in the private sector to unsustainable levels. Post asset bubble, capital should flow out of the US and weaken the dollar. A weak dollar is exactly what we need as it makes our goods cheaper overseas, and thus increases demand in the US. Now, the problem we are facing is that the dollar is not allowed to go down - our trading partners, such as China, are buying the dollar en mass in an effort to keep the dollar artificially strong (in order to help their own economies). i.e., Rubin's perceived harmful reactions to the weak dollar elsewhere is wrong. i.e., Rubin has it backwards - the current state of FX and trade is abnormal, artificial, and harmful. Our trade partners should let the dollar adjust naturally and peacefully. What they are doing right now is very harmful.

Matthew says the risks are not 'symmetrical' and if the economy is poised to take off, QE2 will only help it do so faster.

There are, however, we think, two big risks, because the Fed identified the wrong problem.

The problem is not a hopelessly weak economy in which hiring will never pick up without the Fed buying half a trillion in Treasuries: the problem is healthy businesses lacking confidence in the future.

The two risks of QE2, then, are that the Fed owns half a trillion of Treasuries into a strong economy (i.e. rising interest rate environment); or, worse, the foreclosure crisis, which is an anchor on the recovery, has not been dealt with--as it could be via a massive FDIC-type purchase program.

Anonymous repeats the mantra that we are in a deflationary environment without QE2. Outside housing in the United States, I see no evidence of a deflationary environment anywhere in the US or elsewhere--which leads me back to QE2 failing to go after the real problem: the millions of foreclosures overhanging the US market.

And if Bob Rubin is not qualified to comment on monetary policy since it falls outside his 'circle of competence,' well, then not many people are qualified...including us!

TBTF only made one comment in this thread. TBTF takes exception to being lumped in w/ Anonymous.

At any rate Jeff, you observe that banks balance sheets are in fact healthy because they are "well capitalized". That is the part of the balance sheet at the very top. Go down one level to Long Term Assets and look at the line item title RMBS. While it may look like there is a large, healthy number printed on that line, TBTF would argue that that number needs to be discounted. Now discounting that number is quite subjective, but TBTF likes the nice round number of 50% as an estimate (aka SWAG).

Now this melt down might not happen for some period of time, but TBTF certainly thinks that the institutional investors, insurance companies and, yes, even Uncle Sam, the de facto owner of Fannie & Freddie, will not take too kindly to the banks representing that an RMBS is a wonderful security when in fact it is a box filled with Charles' finest Yada-Yada execution.

To claim that the big banks are on solid ground is "thumb sucking" as Charlie Munger would say.

We keep talking past each other. But I think I know why - because you don't look/believe at/in economic data, and focus mainly on conference calls instead. I think your approach works in a normal economy but not near depression and zero bound territory. But more importantly, there is a fallacy of composition here. Let me explain.

"The correlation between positive outlooks from most major public companies and future employment should be clear"

Not really. Imagine the US economy has only two private companies (in addition to the US government), Bed Bath and Beyond (BBB), and Linens N Things (LNT) during the bubble years. Post bubble, LNT is gone, so you can only listen to the conference calls from BBB. And of course the BBB calls are wonderful, the management was up beat, sales were strong, they are expanding, they want to hire more workers, etc. But guess what? BBB is doing fine mainly because LNT is gone - less competition. In the meantime, the former LNT stores are empty, most of the former LNT workers are still jobless, and the US economy as a whole is suffering. But you don't know this if your universe is limited to the conference calls. You would think that if BBB is doing so well, then everything must be rosy. But you would be wrong.

I believe many studies have shown that most growth in employment comes from SMEs, not S&P500 companies. While the comments you cite are positive, I worry that these are companies that have cut deeply into their payrolls and will now only add back very slowly. Furthermore, they are companies that are benefiting in part because their smaller competitors have fallen. In short, is there survivorship bias in these call anecdotes?

Certainly this administration has not made life easier for the SMEs & entrepreneurs that will hopefully lead us out of this mess.

Jeff, I just wanted to drop in and say THANK YOU for coming today to the FAME II event and once again giving up your time to help out us young professionals. Your assistance is greatly appreciated! And another big thanks for supplying the entire conference with a copy of your book. I look forward to reading it as I know your insight is of great value.

Jeff,You wrote in the comment section: "Much better, in my view, would be this: have the FDIC use the Fed's half a trillion of QE2 to take all the foreclosed houses in America off the market. That would be far more stimulative than another minor drop in rates."

I think this statement highlights a problem with your criticism of the FED/Bernanke. Bernanke would almost certainly agree with you. In fact, he would probably support the use of almost any Fiscal stimulus over the use of QE2. Unfortunately Fiscal policy and your suggestion are politically impossible to implement.

I think the only way to criticize the FED's decision on QE2 would be to propose an alternative course of action that was actually possible to implement. Or alternatively as you also possibly tried to do, argue that there is not a problem.

As far as deflation goes, falling loans outstanding(either from tighter lending standards, or reduced intentions to borrow) rising saving rate, and exploding corporate cash balances with weak investment are all deflationary. Inflation is a tricky topic as there is frequently an environment of Asset inflation/CPI disinflation or some such mix. Clearly commodity prices are rising in the context of CPI disinflation and as far as wage pressures go, a rise in hourly earnings is certainly helpful, though hardly inflationary at less than 2% and less than productivity increases.

Your comments are thought provoking but I was not persuaded that you have illustrated anything beyond what is already well known: that is that low growth low inflation environments are good for corporate earnings and stocks.

The FED has full employment as a core policy objective. Although you argue that employment will improve absent any further action by the FED, you also argue that their are several structural issues that are holding back business confidence (taxes, healthcare, regulation). As a result I am not sure if you are making the strong argument that unemployment is not a problem? I find the preponderance of the evidence to point to unemployment being an ongoing problem for more than five years. do you expect any of the companies you cite in your blog post to reach new highs in head counts [in the US] over the next five years? How about new highs plus the rate of underlying labor force growth? There are some 10-15 million people who need a job, that implies new jobs created at a rate of 150k - 250k on top of the underlying 150k needed to match labor force growth. YIKES! QE2 is unlikely to help, but that sure seems like a problem to me...

Two points: Bernanke's obsession with possible deflation is what got us into this mess in the first place. He made speeches around the country in 2003 supporting the Fed's move to 1%.Secondly, the history of the Fed is that monetary policy takes affect with a long and variable lag. Many times after it is no longer needed.

QE2 has nothing to do with curing unemployment or raising aggregate demand; it's purpose, like that of QE1, is to allow the banks, which are still insolvent, to continue to recapitalize...none of the RMBS or CMBS have been written down to market value; they're still playing extend & pretend...